Soaring Brent crude oil prices are tracking the same path as in 2007-08, when they hit a record $150 a barrel before demand destruction kicked in and prices crashed in a global recession, analysis by Mitsubishi UFJ Financial Group (MUFG) shows.
Brent crude hit $110 on Wednesday, its highest since June 2014, as supply disruption fears mounted after hefty sanctions on Russian banks in response to the intensifying Ukraine conflict.
“Oil prices have become so disconnected from the marginal cost of supply – given the extreme shortage of oil – that they are marching to the level where demand destruction becomes prevalent,” said MUFG’s head of emerging markets research, Ehsan Khoman.
“Supply scarcity is being played out in oil markets today, which critically predates the geopolitics of the day – the Russia-Ukraine (crisis) merely turbocharges today’s extreme supply shortages.”
A coordinated release of 60 million barrels of oil from strategic reserves by International Energy Agency (IEA) member countries was agreed on Tuesday but failed to calm spiking prices.
Oil inventories in the developed world have been steadily decreasing in recent months amid a sharp post-pandemic demand recovery.
At the same time, global spare production capacity that can be switched on at short notice has been shrinking as the Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia increase their output targets.